Labor productivity: how it grew and what drives it

What labor productivity is: the shrinking hour

Labor productivity is output per hour worked: everything a sector produces, after inflation, divided by the hours people spent producing it. In the US the Bureau of Labor Statistics measures it every quarter for the nonfarm business sector — most of the economy, leaving out government, nonprofits and farms.

Since Q1 1947 that number has grown ×5.5. Turn it around and the hour shrinks: what a worker produced in a full hour in 1947 now takes about 11 minutes. Over the last four quarters, to Q3 2026, output per hour rose 2.1%.

Five eras of growth

Productivity has never grown at a steady pace. In the golden age, 1947–1973, output per hour rose 2.7% a year and doubled every 26 years. Then came a long slowdown: 1.5% a year until 1995. The computer and internet boom lifted it back to 3.1% in 1995–2004; from 2004 to 2019 it sank to 1.6% again. Since 2019: 2.2% a year to Q3 2026, faster than the 1.6% of 2004–2019.

Why computers took so long to show up in these numbers is the famous productivity paradox — it has its own chapter in Economic paradoxes. Here the question is what moved the numbers in each era; the next section splits the growth into its sources.

The road not taken

Small differences compound. Had output per hour kept its golden-age pace of 2.7% a year after 1973, it would now be 1.5 times its actual level. The gap between the dashed line and the real one is the price of the slowdowns.

What drives it: capital, skills and ideas

Economists split productivity growth into three sources. Capital deepening: more and better equipment, buildings, software and research for every hour worked. Labor composition: a workforce with more education and experience. And total factor productivity (TFP): everything else — new technologies and ideas, better management and organization, work moving to more productive firms. TFP is what is left once capital and skills are counted, so it also collects measurement errors.

In the golden age TFP added 2.01 of the 3.10 percentage points of growth a year (65%). It fell to 0.52 in 1973–1995, came back to 1.81 in the IT boom and dropped to 0.49 in 2004–2019; since 2019 it has added 1.16. Capital deepening ranged from 0.71 to 1.25 points a year across the eras, skills from 0.19 to 0.31.

So the slowdowns were above all slowdowns of TFP: of the 1.62 points a year that growth lost between 1947–1973 and 2004–2019, TFP accounts for 94%.

Who produces the most per hour

Comparing countries needs a common yardstick: output valued at purchasing-power parities — what money buys locally — divided by the hours worked. By that measure the US produced $84 an hour in 2023, No. 8 of the 126 countries with at least 1 million people and hours data. The top three were Ireland (189% of the US level), Norway and Switzerland. Ireland's figure is lifted by the profits of multinational companies booked there. Norway's includes oil and gas, which take few hours to produce a lot of value. Among large economies, with more than 30 million people, the leaders were the United States (100%), Germany (99%) and France (93%).

Hours matter as much as output. In 2023 a worker in Germany put in 1,335 hours on average, against 1,789 in the US, and produced about as much per hour (99% of the US level) — but only 74% as much per worker. A shorter working year is productivity taken as free time instead of income.

Catching up with the US — and falling back

Each panel shows a country's output per hour as a share of the US level in the same year. 2 of these 12 countries produced as much per hour as the US or more in 2023: the Netherlands and Ireland. Ireland climbed the most, from 24% of the US level in 1950 to 189%; Mexico fell back the most, from a peak of 78% in 1981 to 32% in 2023.

Do poorer countries catch up?

Economic theory says they should: a poorer country can copy technologies instead of inventing them, and each new machine adds more where there are few. The scatter tests it on 107 countries with at least 1 million people: output per worker in 1970, as a share of the US level, against how fast output per worker grew from 1970 to 2023.

The pull exists, but it is not automatic. Of the 56 countries that started below 25% of the US level, 30 grew faster than the US (1.5% a year) and closed part of the gap; 26 fell further behind. The fastest were China (7.0% a year, from 2% of the US level), Taiwan (4.5%) and South Korea (4.4%).

Among the 27 countries that started above 50% of the US level, catch-up came close to a rule: the further behind, the faster they grew (correlation −0.75). The United Arab Emirates, Bahrain, Kuwait, Qatar and Saudi Arabia started out ahead of the US per worker in 1970 and have produced less per worker since: oil exporters, whose output follows the price of oil.

Productivity and pay

Does higher productivity raise pay? Over the long run it has to — wages are paid out of output. But how closely pay has followed productivity since 1973 is one of the most argued-over charts in economics, and the answer turns on measurement choices. The staircase changes one choice at a time, from 1973 to Q3 2026.

Output per hour rose 165%. The hourly pay of all workers — wages plus benefits — measured in the prices of what businesses produce rose 121%; the difference is the change in labor's share of income (−17%), and why it moved is one of the open questions in Economic mysteries. Measured in what workers buy, the same pay rose 95% with the PCE price index and rose 52% with the CPI. The hourly wages of production and nonsupervisory workers, without benefits, rose 4% after CPI inflation.

Each step answers a different question. The first two ask whether workers as a whole receive their share of what they produce; the last ones ask what an ordinary paycheck buys. The choice of price index is no detail: over these years the CPI rose faster than the PCE index, partly because of how it is built — a fixed basket and, before 1983, the way it counted home prices.

Era by era, pay kept to productivity's rhythm: in the two fastest eras, 1995–2004 and 1947–1973, pay in output prices grew 3.0% and 2.6% a year; in the two slowest, 2004–2019 and 1973–1995, 1.1% and 1.2%.